Rio Tinto predicts falling iron ore prices

On March 25th, by participating in the “China Development High Level Forum”, the new CEO of international giant Rio Tinto (Sam Walsh) received an interview in Beijing.

Sam Walsh is a frequent visitor to China. So far, Sam Walsh has come to China more than 40 times. The domestic mining industry is no stranger to Sam Walsh. Prior to his new position, Sam Walsh was the head of Rio Tinto's iron ore business. Iron ore is the most important mineral product sold to China by Rio Tinto in the past few years.

Not long ago, Rio Tinto predicted that iron ore will fall by 50% in the next 18 months. "I think (iron ore) will drop to a more normal level in the future." Sam Walsh admits.

The industry’s concern is, what changes will the new CEO bring to Rio Tinto? In response, Sam Walsh told the reporter that the overall strategy of Rio Tinto's "investment in large-scale, low-cost mine projects" will not change, and strengthening its relations with China "is still my important work." However, in the implementation of the strategy, "more emphasis will be placed on personal characteristics, professionalism and organizational discipline."

Sam Walsh also plans to increase its non-core asset stripping efforts. In the past four years, Rio Tinto has totally stripped 20 assets worth US$12 billion.

Predicting the fall in iron ore prices Although the profitability of the steel industry is difficult, iron ore prices remain at around US$150/tonne.

Sam Walsh believes that there are three reasons why iron ore prices are relatively high. First, the climate causes the iron ore to reduce production. Second, steel mills go to inventory. Third, the steel production at the beginning of the year is relatively large.

Rio Tinto recently conducted a study on iron ore projects scheduled to be put into production from 2008 to 2012 and found that only one-third of the projects were put into production as planned.

“There are many reasons for this problem. Some of them are difficult to extract, some have complicated approval procedures, and the difficulty of financing is increasing. The number of workers with technical content is also decreasing,” said Sam Walsh.

Sam Walsh believes that in the first few months of this year, the higher iron ore prices were mainly caused by insufficient supply. When supply gradually balances, iron ore will drop to “normal level”.

Not long ago, Vivek Tulpule, chief economist of Rio Tinto, said in a research report that iron ore prices are expected to fall below the level of 100 U.S. dollars per ton in the next 18 months, that is, they will be 50% lower than current prices. .

Another major mining giant, Vale, has made a different prediction from Rio Tinto. Vale expects the price of iron ore to remain between $110 and $145 this year.

An industry insider told this reporter that Rio Tinto’s bearish view on iron ore prices was due to Rio Tinto’s lowest cost among the three major mines. Iron ore prices have had the least impact on them, and other high-cost projects It has a direct impact.

It is worth noting that even if the price of iron ore falls, most of the iron ore projects in Western Australia and Brazil still have a large profit margin. Vale told the reporter that even if the price of iron ore falls below 110 US dollars / ton, it will not stop the expansion of the Caracas project because "there is still room for profit."

In recent years, Rio Tinto's iron ore has been in expansion. Last year, Rio Tinto's total iron ore shipments reached a record 247 million tons (100% of shares), and the iron ore business contributed nearly 80% of the Group's profits. This year, Rio Tinto also plans to further increase the total production of iron ore.

Further stripping of assets For many multinational corporations, divesting and investing are almost twin brothers. However, during the economic downturn, the separation of assets became a common practice.

Since last year, Rio Tinto has stepped up asset stripping and announced the further sale of a number of non-core business assets, including the signing of a binding agreement on the sale of the company's shares in Palabora Mining Co., Ltd., completing the Lynemouth Power Plant and Alcan Cable Corporation China. Sales of business, etc.

Recently, the market has also rumored that Rio Tinto will sell its iron ore business in Canada. The transaction valuation may be as high as $1.7 billion. In response, Sam Walsh told the reporter that the Canadian iron ore project is currently being evaluated and studied. "I know some banks are interested in this project. I am also very interested in their quotations, but I think It is emphasized that this is not an overnight transaction. "The key to whether or not to sell the project is whether the quotation is higher than our estimated value."

Sam Walsh also said that Rio Tinto attaches great importance to the value of the asset itself and will retain those assets that can bring high value, but "if anyone quotes higher than our estimate, we will consider selling."

Rio Tinto is also studying whether to sell diamond assets. "There is no decision yet to sell or retain, and efforts are being made to reduce its costs."

Rio Tinto researched and sold some of its assets including the iron ore business in Canada. The main reason was not that the price of iron ore had fallen, but that it was due to the overall strategy of the Group to reduce costs.

According to our reporter, Rio Tinto has decided to reduce the cost of 5 billion U.S. dollars in the next two years. Among them, 2013 will have to reduce the cost of 2 billion U.S. dollars, and in 2014 it will reduce 3 billion U.S. dollars. Among them, two-thirds of the cost reduction work is for the aluminum sector and the energy sector.

Rio Tinto also continued to seek to split its Pacific Aluminum Group. In addition, Sam Walsh revealed that there will be other businesses announced for sale.